Important Financial Issues to Address During Divorce

Divorce is a stressful process for everyone. Among the many considerations are the financial issues that arise from the situation. From receiving a fair alimony to ensuring childcare expenses are covered by child support to the sometimes contentious process of dividing assets, there's a lot to think about.

Division of Assets

Division of assets often takes center stage during a divorce. How this process plays out will largely depend on the route you take, be it through mediation or court. Mediation can help save money on legal fees, but is only an option if both spouses are able to work together in an amicable way since the mediator will not act as judge. Your state's property laws will also play a big role. Some states are "community property states," meaning all property acquired while married are considered joint assets.

Inversely, debts must also be divided. A credit report can help decipher what debt is in which spouse's name. One strategy is to make three separate balance sheets of debts: Yours, Mine, and Ours. You can work together to pay the debts down before divorce, barter to take on more debt in exchange for more property division, or agree to share responsibility of the debt moving forward.

Cashflow

In addition to the long-term division of assets, short-term cashflow should be a consideration, especially for a spouse who was or is primarily stay-at-home. Make sure you have access to operating money, including some level of liquidity for bigger bills that may arise during the divorce process. A common mistake people make is underestimating expenses when creating an initial budget for temporary alimony (sometimes referred to as "maintenance"). A financial professional can help with this process.

Compensation can vary from year-to-year due to a variety of factors like self-employment income, stock options, etc. Include a plan to handle these fluctuations and select a neutral party to audit them at least annually. Some ex-spouses may try to wiggle around paying their fair share in the settlement by asking employers to delay bonuses or underreporting income. If your ex-spouse typically handled financial matters while you were married, they may have greater knowledge of your financial situation. Collect as many records of your financials as possible to help ensure a fair settlement.

Insurance

A change in marital status can often mean a change in insurance as well. You may need to update or obtain new car insurance, life and disability insurance, and medical insurance for you or your children. COBRA is typically available to divorced spouses for 36 months. You may also want to insure the divorce settlement to protect against unexpected death or injury to your ex-spouse.

Childcare Expenses

Alimony and child support are meant to help with childcare, but too often many expenses are overlooked. Things like coaching, therapy (or other treatments not fully covered by insurance), tutoring, field trips and more should be included when considering total childcare expenses. A joint account dedicated to childcare expenses can be a solution made in advance or as part of the settlement. Don't forget to factor inflation when projecting childcare expenses. Certain costs like college education rise at higher rates than general inflation.

Taxes

The tax considerations of a divorce should not be glossed over either. In addition to joint income taxes that may be due, assets received through a divorce settlement can also be subject to taxation. Allow time for a financial advisor and tax professional to review settlement details to analyze its long-term impact. Other important tax details can include questions like which spouse claims the children as dependents or who will be able to claim head of household status.

Future Planning

Begin working on a new estate plan right away. In addition to your assets having changed, it's likely your beneficiaries will too. Have a new plan ready to go so you can name new trustees and beneficiaries as soon as the divorce is finalized. Consider your new retirement plan as well. Your needs are likely to be different, and what was once sufficient for a joint retirement plan may not be sufficient for an individual plan once divided through the divorce settlement.


The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.

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